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Ruling

Subject: Small Business Tax Break

Question

Will the demonstrator vehicle which you purchased be considered a new vehicle for the purposes of the small business investment allowance in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

1 July 2008 to 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The taxpayer purchased a motor vehicle from a retail car dealer. It was first registered by the car dealer. The dealer used the vehicle for about seven months and the registration certificate notes that the vehicle would be used as a "demonstrator vehicle used by licensed motor dealer."

The new car cash price was $X. It was sold to the taxpayer for $Y. During the period that it was held by the dealer the car travelled in excess of 10,000 kilometres.

Relevant legislative provisions

Section 41-20 Income Tax Assessment Act 1997

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons For Decision are to the Income Tax Assessment Act 1997.

Summary

The extent of the use of the motor vehicle by the dealer supports an objective conclusion that the use amounted to more than reasonable testing and trialling for the purposes of subsection 41-20(3). The facts indicate that at the time of purchase the motor vehicle could not be considered new for the purposes of the relevant legislation. As a consequence, the vehicle would not meet the requirements to qualify for the investment allowance in Division 41.

Detailed reasoning

Division 41 allows an additional deduction for certain business investment in new, tangible depreciating assets and for new expenditure on existing assets. To qualify, the asset must not have been previously used or installed ready for use for any purpose (paragraph 41-20(1)(e)). The Revised Explanatory Memorandum to Tax Laws Amendment (Small Business and General business Tax Break) Bill 2009 notes at paragraph 1.59:

Division 40 of the ITAA 1997 does not contain a concept of new or second-hand assets. However, this is an important feature of the eligibility criteria for the Tax Break. An asset is new for the purposes of the Tax Break if it has never been used or installed ready for use either by the taxpayer or another entity for any purpose…This means that second-hand assets are not eligible for the Tax Break

Although the general rule is that the tax break is only available for investment in new assets, there is an exception in the case where the previous use of the asset 'was merely for the purposes of reasonable testing and trialling,' as stated in subsection 41-20(3). That exception is noted in the Revised Explanatory Memorandum notes at paragraph 1.62.

To come within the scope of the exception, there are effectively two requirements that need to be satisfied. Not only must the use satisfy the description of testing or trialling but also the nature and extent of that use must be reasonable.

The policy context of the tax break is to provide an incentive in the form of a temporary bonus tax deduction for investment in new tangible assets. Once an asset has been used it can no longer be described as new. However, in the limited case of use for reasonable testing and trialling, the law provides that the asset can nevertheless be eligible for the tax break.

As the Explanatory Memorandum notes, an asset can still be considered new despite it having been used for testing and trialling, if the nature and extent of that use is consistent with the asset retaining the essential attributes of what would be regarded as a new asset. In that sense, the adverb 'reasonable' qualifies the nature and extent of the testing and trialling which can have occurred. Accordingly, if the testing and trialling results in the asset losing the essential qualities of a new asset, then it is considered that the use will mean the asset is ineligible for the tax break.

In the case of a motor vehicle that is sold as a 'demonstrator', the duration of the period for which it has been used and the extent of the use in terms of total kilometres travelled will be indicators of whether the vehicle can still be considered new. Another factor will be the extent of any warranty offered in respect of the vehicle.

That approach is consistent with the interpretation applied in the context of the old investment allowance law in determining whether an asset was able to qualify as 'new' under former subsection 82AQ(1) of the Income Tax Assessment Act 1936 . Taxation Ruling IT 2132 (withdrawn on 9 April 1997 as it dealt with provisions which were no longer operative) examined the circumstances in which a demonstrator vehicle could be regarded as new. The Ruling notes at paragraph 3 that 'a limited amount of demonstration mileage is not regarded as affecting the newness of a particular vehicle'. Further at paragraph 4 it states:

 As a guide it may be accepted that a vehicle which would otherwise qualify as new will continue to be so regarded where it is used for ordinary demonstration purposes for less than three months. The term "ordinary" is used to guard against the situation where there may be excessive use of a vehicle for demonstration purposes in a three month period which would lead to the conclusion that the particular vehicle could not be regarded as new in the hands of the purchaser.

The basis upon which the Ruling distinguished between demonstrator vehicles that could be regarded as new and those that could not turned on whether the use detracted from the 'newness' of the vehicle. As a guiding principle, use over a significant period or use that exceeded the mileage that would be expected for 'ordinary' demonstration purposes was regarded as detracting from the quality of 'newness' of the vehicle.

Whether the use of a demonstrator motor vehicle for the purposes of testing and trialling is 'reasonable' is a question of fact and degree. Where it can be objectively concluded that factors such as the period of use and the extent of use mean that the vehicle can no longer be considered new, then the testing and trialling will not be regarded as reasonable.

In the present case, the following facts apply:

· the period over which the vehicle was used for testing and trialling. When the vehicle was sold, it had been registered and used as a demonstrator model for several months;

· the number of kilometres travelled. The vehicle had travelled several thousand kilometres in the course of its use by the dealer; and

· the decline in the market value of the vehicle compared to the new price. The sale price represented a substantial discount on the new car price;

These facts related to the use of the motor vehicle by the dealer support an objective conclusion that the use did not amount to reasonable testing and trialling for the purposes of subsection 41-20(3). The dealer had utilized the car for a substantial period and a significant number of kilometres had been accumulated prior to the sale. In addition, the vehicle was sold to the taxpayer for an amount significantly below the new car price.

The facts indicate that at the time of purchase the motor vehicle could not be considered new for the purposes of section 41-20. As a consequence, the vehicle would not meet the requirements to qualify for the investment allowance.